PROJECT AGREEMENT. (Renewable Energy Development Sector Investment Program Project 1) between ASIAN DEVELOPMENT BANK. and PROVINCE OF PUNJAB

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1 LOAN NUMBER 2286/2287(SF)-PAK PROJECT AGREEMENT (Renewable Energy Development Sector Investment Program Project 1) between ASIAN DEVELOPMENT BANK and PROVINCE OF PUNJAB DATED 5 October 2007 PAL:PAK 34339

2 PROJECT AGREEMENT PROJECT AGREEMENT dated 5 October 2007 between ASIAN DEVELOPMENT BANK (hereinafter called ADB) and PROVINCE OF PUNJAB (hereinafter called Punjab). WHEREAS (A) By a Loan Agreement of even date herewith between ISLAMIC REPUBLIC OF PAKISTAN (hereinafter called the Borrower) and ADB (hereinafter called the Ordinary Operations Loan Agreement), ADB has agreed to make to the Borrower a loan (hereinafter called the Ordinary Operations Loan) of twelve billion five hundred eight million six hundred fifty thousand Japanese Yen ( 12,508,650,000) on the terms and conditions set forth in the Ordinary Operations Loan Agreement; (B) By a Loan Agreement of even date herewith between the Borrower and ADB (hereinafter called the Special Operations Loan Agreement, and together with the Ordinary Operations Loan Agreement, the Loan Agreements), ADB has agreed to make to the Borrower a loan (hereinafter called the Special Operations Loan, and together with the Ordinary Operations Loan, the Loans) in an amount equivalent to six million seven hundred ninety three thousand Special Drawing Rights (SDR6,793,000) on the terms and conditions set forth in the Special Operations Loan Agreement; (C) ADB has agreed to make the Loans only on the condition that a portion of the proceeds of the Loans be made available to Punjab and that Punjab agree to undertake certain obligations towards ADB as hereinafter set forth; and (D) Punjab, in consideration of ADB entering into the Loan Agreements with the Borrower, has agreed to undertake the obligations hereinafter set forth; NOW THEREFORE the parties hereto agree as follows: ARTICLE I Definitions Section Wherever used in this Project Agreement, unless the context otherwise requires, the several terms defined in the Loan Agreements and in the Loan Regulations (as so defined) have the respective meanings therein set forth, except that for purposes of this Project Agreement, the term "the Project" means Punjab components of the Project, as described in Schedule 1 to the Ordinary Operations Loan Agreement.

3 2 ARTICLE II Particular Covenants Section (a) Punjab shall carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, environmental and social practices. (b) In the carrying out of the Project and operation of the Project facilities, Punjab shall perform all obligations set forth in each of the Loan Agreements to the extent that they are applicable to Punjab and all obligations set forth in the Schedule to this Project Agreement. Section Punjab shall make available, promptly as needed, the funds, facilities, services, equipment, land and other resources which are required, in addition to the proceeds of the Loans, for the carrying out of the Project. Section (a) In the carrying out of the Project, Punjab shall employ competent and qualified consultants and contractors, acceptable to ADB, to an extent and upon terms and conditions satisfactory to ADB. (b) Except as ADB may otherwise agree, all Goods, Works and consulting services to be financed out of the proceeds of the Loans shall be procured in accordance with the provisions of Schedule 4 to the Ordinary Operations Loan Agreement. ADB may refuse to finance a contract where Goods, Works or consulting services have not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB. Section Punjab shall carry out the Project in accordance with plans, design standards, specifications, work schedules and construction methods acceptable to ADB. Punjab shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request. Section (a) Punjab shall take out and maintain with responsible insurers, or make other arrangements satisfactory to ADB for, insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice. (b) Without limiting the generality of the foregoing, Punjab undertakes to insure, or cause to be insured, the Goods to be imported for the Project and to be financed out of the proceeds of the Loans against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods.

4 3 Section Punjab shall maintain, or cause to be maintained, records and accounts adequate to identify the Goods, Works and consulting services and other items of expenditure financed out of the proceeds of the Loans, to disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition. Section (a) ADB and Punjab shall cooperate fully to ensure that the purposes of the Loans will be accomplished. (b) Punjab shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the Project, the performance of its obligations under this Project Agreement, or the accomplishment of the purposes of the Loans. (c) ADB and Punjab shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the Project, Punjab and the Loans. Section (a) Punjab shall furnish to ADB all such reports and information as ADB shall reasonably request concerning (i) the Loans and the expenditure of the proceeds thereof; (ii) the Goods, Works and consulting services and other items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of Punjab; and (v) any other matters relating to the purposes of the Loans. (b) Without limiting the generality of the foregoing, Punjab shall furnish to ADB quarterly reports on the execution of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter. (c) Promptly after physical completion of the Project, but in any event not later than three (3) months thereafter or such later date as ADB may agree for this purpose, Punjab shall prepare and furnish to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by Punjab of its obligations under this Project Agreement and the accomplishment of the purposes of the Loans. Section (a) Punjab shall (i) maintain separate accounts for the Project; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the proceeds of the Loans and compliance with the financial covenants of the

5 4 Loan Agreements as well as on the use of the procedures for imprest account/statement of expenditures), all in the English language. Punjab shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. (b) Punjab shall enable ADB, upon ADB's request, to discuss Punjab s financial statements and its financial affairs from time to time with the auditors appointed by Punjab pursuant to Section 2.09(a) hereabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only in the presence of an authorized officer of Punjab unless Punjab shall otherwise agree. Section Punjab shall enable ADB's representatives to inspect the Project, the Goods and Works financed out of the proceeds of the Loans, all other plants, sites, properties and equipment of the Punjab, and any relevant records and documents. Section (a) Punjab shall, promptly as required, take all action within its powers to maintain its corporate existence, to carry on its operations, and to acquire, maintain and renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its business. (b) Punjab shall at all times conduct its business in accordance with sound administrative, financial, environmental and social practices, and under the supervision of competent and experienced management and personnel. (c) Punjab shall at all times operate and maintain its plants, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound administrative, financial, engineering, environmental, social, and maintenance and operational practices. Section Except as ADB may otherwise agree, Punjab shall not sell, lease or otherwise dispose of any of its assets which shall be required for the efficient carrying on of its operations or the disposal of which may prejudice its ability to perform satisfactorily any of its obligations under this Project Agreement. Section Except as ADB may otherwise agree, Punjab shall apply the proceeds of the Loans to the financing of expenditures on the Project in accordance with the provisions of the Loan Agreements and this Project Agreement, and shall ensure that all Goods, Works and consulting services financed out of such proceeds are used exclusively in the carrying out of the Project. ARTICLE III Effective Date; Termination Section This Project Agreement shall come into force and effect on the date on which both of the Loan Agreements shall come into force and effect. ADB shall promptly notify Punjab of such date.

6 5 Section All the provisions of this Project Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under either or both of the Loan Agreements. ARTICLE IV Miscellaneous Section Any notice or request required or permitted to be given or made under this Project Agreement and any agreement between the parties contemplated by this Project Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex, facsimile or radiogram to the party to which it is required or permitted to be given or made at its address hereinafter specified, or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are: For ADB Asian Development Bank P.O. Box Manila, Philippines Cable Address: ASIANBANK MANILA Telex Numbers: ADB PH (RCA) ADB PM (ITT) ADB PN (ETPI) Facsimile Numbers: (632) (632)

7 6 For Punjab Irrigation Secretariat Government of Punjab Old Anarkali, Lahore Pakistan Attention: Secretary, Irrigation and Power Facsimile Number: (042) Section (a) Any action required or permitted to be taken, and any documents required or permitted to be executed, under this Project Agreement or under Section 7.01 of each Loan Agreement by or on behalf of Punjab may be taken or executed by its Governor or by such other person or persons as he shall so designate in writing notified to ADB. (b) Punjab shall furnish to ADB sufficient evidence of the authority of each person who will act under paragraph (a) of this Section, together with the authenticated specimen signature of each such person. Section No delay in exercising, or omission to exercise, any right, power or remedy accruing to either party under this Project Agreement upon any default shall impair any such right, power or remedy or be construed to be a waiver thereof or an acquiescence in such default; nor shall the action of such party in respect of any default, or any acquiescence in any default, affect or impair any right, power or remedy of such party in respect of any other or subsequent default.

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9 8 SCHEDULE Execution of Project; Financial Matters 1. Punjab shall carry out the Project in accordance with the FFA and all the Schedules (including Annexes) attached thereto. Financial Management and Performance Indicators 2. Punjab shall initiate discussions with NTDC or any other potential buyer on tariff as described in the draft PPA and shall ensure that the PPA is signed as a condition for disbursement of the Loan proceeds for payment for generators and power transformers in accordance with paragraph 7(b) of Schedule 3 to the Ordinary Operations Loan Agreement. 3. Punjab shall ensure that as soon as legally established and fully functional, the Punjab Power Development Company Limited (PPDCL) enters into a Project Agreement with ADB. 4. Punjab shall cause PPDCL to define its corporate identity, devise a business plan and a strategic development roadmap, so that a single corporate body is accountable for a given business not later than 30 June Punjab shall cause PPDCL to implement the institutional strengthening plan agreed with ADB to attain financial and operational independence not later than the FY ending Punjab shall cause PPDCL to maintain a debt service coverage ration (DSCR) of 1.2, operating ratio of 80 percent, return on net fixed assets of 5 percent, and 70:30 debt to equity ratio from FY2009 onwards. Land Availability and Resettlement 7. Without limiting the generality of Schedule 5 to the FFA and all the Annexes attached thereto, Punjab shall, subject to compliance with the relevant provisions of the Resettlement Framework (RF), the Resettlement Plan (RP), Environmental Assessment Framework (EAF) and Environmental Management Plan (EMP), and in accordance with all applicable laws and regulations of the Borrower and Punjab, acquire or make available the land and rights to land free from any encumbrances, and clear utilities, trees, and any other obstruction from such land, required for commencement of construction activities in accordance with the schedule agreed under the related civil works contract. 8. Punjab shall ensure that all land and rights-of-way required by the Subprojects are made available in a timely manner and that the provisions of the RP, including compensation and entitlements for affected households and persons, are implemented in conformity with all applicable laws and regulations of the Borrower, including as amended from time to time, and the entitlement benefits as listed in the Borrower s applicable laws, and ADB s Policy on Involuntary Resettlement, 1995, and the agreed RF.

10 9 Schedule 9. Punjab shall ensure that people affected by each Subproject are fairly compensated and in a timely manner on replacement values in accordance with the RP and RF, such that their living standards are not adversely affected. Punjab shall submit progress and completion reports on land acquisition and resettlement under the quarterly progress reports for each Subproject. 10. Within three (3) months of the Effective Date, Punjab shall engage an independent external expert/agency acceptable to ADB for monitoring and verification of the RP implementation under each Subproject that will be responsible for providing ADB through the PMU, quarterly monitoring and evaluation reports on resettlement implementation in accordance with the RP. 11. Within three (3) months of the Effective Date, Punjab shall also establish a grievance redress committee (GRC) for the Project for addressing any grievances from affected peoples concerning resettlement, environment, and other social issues in a timely manner. Environment 12. Without limiting the generality of Schedule 5 to the FFA, Punjab shall ensure that environmental assessment of the Subprojects is conducted according to the ADB s Environment Policy, 2002, the Borrower s environmental laws, and the EAF. Midterm Review 13. A midterm review shall be carried out two (2) years after the Effective Date. The midterm review shall, among other things, focus on the engineering, resettlement, environmental aspects of the Project and the financial status of PPDCL.